Projects with simple income distribution effects

5. Projects with simple income distribution effects

If the effects of a project are particularly sim- ple, aggregation of information becomes easier. Assume that a project is such that some individu- als pay exactly the same amount of money to implement the project. A group of people who pay the same but who may be different in any other respect will be called an equal payment group. 25 In that case, the change in social welfare due to project b can be written as a weighted sum of the costs borne by each equal payment group, the change in environmental quality in physical units, and the change in the intrinsic value variable: W j b, a = H g = 1 [n g x g bb g j ] + g j Dyb + V j Z Z b 5.1 Here, − x g is the cost paid by each individ- ual in the equal payment group g, b g j = 1n g i g V j v i j n j x i is the average wel- fare weight attached by decision-maker j to indi- viduals in g, n g is the number of members in g, while H 5 N is the number of equal payment groups. Consequently, if the number of equal payment groups is small enough, then any decision-maker can evaluate the project based on knowledge of the costs paid by members in each group, physical unit data on the environmental change, and re- ports of changes in rights or any other intrinsic value variable. Formally, if H + 2 5 K, then the physical unit based indicator set P b = {Dx 1 b, . . . ,Dx H b, y b , Z b } 5.2 is a sufficient welfare indicator set for project b. This indicator set is very similar to the indicator set Pb described above. The main difference between them is the way groups are identified. The criterion used in Pb is straightforward to observe, and no restrictions on decision-makers’ social welfare functions are required. Moreover, all subjective judgements concerning welfare weights are left to the decision makers themselves. 26 As a particularly simple example, assume that everybody pays an equal amount of money Dxb to increase the supply of the public good, meaning that H = 1. In this case, the information set {Dxb, y b , Z b } is a sufficient welfare in- dicator set for the project, consisting of only three information items. Based on this simple informa- tion, any decision maker can evaluate the project, even if there is substantial disagreement concern- ing welfare weights. Can we also find a sufficient welfare indicator set, using the equal payment groups approach, based on monetary valuation? The answer ap- pears to be no: Under the equal welfare weight approach, monetary valuation could be used pre- cisely because of the restrictions imposed on wel- fare weights. Under the equal payment group approach, however, no such restrictions are im- posed, which implies that willingness to pay data cannot be aggregated without losing information that may be important for some decision-makers. Different welfare weights will generally imply that the marginal social value of the public good dif- fers between decision-makers. Hence, aggregation of environmental benefits measured in monetary units requires restrictions on welfare weights. To illustrate this, consider the simple example above in which everybody pays the same amount to finance an increase in the public good supply. Assume further that there is no intrinsic value variable, that all decision makers accept willing- ness to pay as an ordinal measure of individual well-being, and that all decision-makers are utili- tarian. Thus, in this example, welfare weights may differ only to the extent that decision-makers have different beliefs about individuals’ marginal well- being of income. The welfare change due to such a project, according to j see Eq. 2.4, is: 26 Note that although Pb and Pb are said to be based on physical units, this relates to the measurement of environ-mental effects; costs are measured in monetary units in both sets. 25 Formally, i and m are members of the same equal payment group with respct to project b if and only if Dx i b = Dx m b. W j b, a = i N n j x i x b + n j y n j x i y b = i N n j x i NB i n 5.3 This expression reveals that individuals’ net benefits cannot be aggregated without restrictions on welfare weights. Thus, without such restric- tions, a sufficient welfare indicator set reporting the environmental change in monetary units would have to include net benefit estimates for every single individual. This would presumably far exceed decision-makers’ information process- ing capacity. The indicator set Pb, on the other hand, would consist of only two information items { x b , y b }. A common view seems to be that the economist should clarify the costs of proposed projects, while the task of judging whether the project is actually worth this cost should be left to policy makers. In the case of projects with simple income distribution effects as discussed above, all subjec- tive welfare judgements can indeed be left to policy makers. This requires, however, that infor- mation about the public good is reported in phys- ical units. If monetary valuation of the public good is to be used, the analyst cannot avoid making non-verifiable and possibly controversial assumptions about welfare weights. 27 An example may help to clarify matters. In the interview survey among Norwegian Members of Parliament by Nyborg 1998 and Nyborg and Spangen 1996, respondents were asked to evalu- ate a hypothetical road investment project. One of the described effects of the project was a slight reduction in the bird population of a nearby protected bird habitat, but this effect was not valued in monetary terms. For simplicity, assume that this was the only environmental issue affected by the project, and that the benefits of the invest- ment project mainly concerned firms’ and work- ers’ earnings and thus could be counted along with the project’s costs as part of individuals’ income change. Then, to calculate the indicator sets Vb and Pb, one would first have to define equal welfare weight groups in practice, the best one can hope for is probably to identify groups with substantially less than average differences between welfare weights. For example, one may use criteria such as low, high or middle income, age, and geographical residence. The monetary- based indicator set Vb would then consist of average net willingness to pay for the project for each of these groups, i.e. their income gain from having the road built, minus their share of the costs to build and maintain the road, minus their willingness to pay to avoid the reduction in bird population. In addition, if some policy-makers are concerned about future generations’ right to a pristine environment, the fact that a protected area is disturbed should be reported in addition. Regarding the physical unit-based indicator set P b, this would consist of average cost for each of the groups, i.e. their income gain from having the road built, minus their share of the costs to build and maintain the road. In addition, it would contain a physical unit measure of the expected reduction in the bird population, such as the number of species or the number of nesting birds; and here, too, the fact that a protected area is affected should be mentioned. The indicator set P b will be similar to Pb except that one would report monetary costs by equal payment groups rather than equal welfare weight groups. Again, one must probably in practice be satisfied with approximations. If the road is financed through general taxation, for example, it is difficult to know who really pays; the project may not necessarily lead to higher taxes, but can alter- natively lead to a reduction in other public con- sumption or transfers. As a rough approximation, one might assume that everyone pays the same small share of investment and maintenance costs, and then use estimated increased earnings due the new road to identify approximate equal payment groups. One may then report costs for several small groups particularly affected by the project, while most of the country’s population could be defined as one large equal payment group for which only a single average cost figure would be reported. 27 If projects are non-marginal in the sense that welfare weights are changed due to the project while other price effects can be disregarded, the indicator set Pb still gives sufficient information since it reports the exact income change and change in the public good supply for every individual, as well as DZb. Respondents of the Nyborg and Spangen 1996 survey reported different views on mone- tary valuation of the environment. Eight of the 16 interviewed politicians expressed skepticism to- ward monetary valuation of environmental changes, while two were clearly positive. The re- maining six did not express specific views on this issue. However, throughout the interview, valua- tion of other non-market goods was also dis- cussed leisure time, statistical lives. Fourteen of the 16 respondents expressed skepticism towards monetary valuation of at least one non-market good. Two of these doubted that sufficiently accu- rate value estimates could be obtained, but nine had quite fundamental objections, for example, that certain goods ought not to be measured in monetary units at all, or that such money values appeared meaningless or just confusing.

6. Summary and concluding remarks